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Jorge Maia Head: IDC Research and Information Department

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  1. Day Month Year SME financing in South Africa: The IDC’s role, differentiation and select success stories Jorge Maia Head: IDC Research and Information Department 2008 Africa SMME Conference and Awards Somerset-West, 23 October 2008

  2. The role of development finance institutions (DFIs) • DFIs can be effective instruments for facilitating access to finance • DFIs typically take a developmental rather than a financial return maximisation approach • Identification, development and financing of projects leading to national objectives being met • Encouraging private sector development • Providing financial products not readily available (e.g. equity, long-term finance, venture capital, etc) • Provide finance when markets are tight • Generally prepared to take and managing a higher risk profile • Often play an advisory role regarding national policy formulation • In addition to financial assistance, may provide other forms of business support (e.g. “hand-holding”)

  3. DFI positioning • DFIs should crowd-in rather than crowd-out commercial financiers • Commercial financial institutions are more efficient in delivering finance to businesses with proven financial track records • If a DFI directly competes with commercial institutions … • It is inefficient • use of unrealistic and unsustainable pricing • risks crowding-out private sector • Implies no value added from the state • Role of DFIs in a market economy should be to address market failures /gaps • Where a DFI is successful and proves a market, others will follow – crowding in commercial financiers, and leaving the DFI having fulfilled its catalytic role • Focus on addressing unmet needs, especially in poorer areas and riskier markets

  4. Comparative information for various DFIs in South Africa 120 100 Total assets indicated IDC by bubble size 80 60 DBSA Assets per employee (R million) NEF 40 NHFC Land Bank RHLF 20 Nurcha UYF IDT 0 0 100 200 300 400 500 600 700 800 -20 Staff numbers South Africa’s national DFI landscape • Industrial Development Corporation (IDC) • Development Bank of Southern Africa (DBSA) • Land and Agricultural Development Bank (Land Bank) • National Housing Finance Corporation (NHFC) • Khula Enterprise Finance (Khula) • National Empowerment Fund (NEF) • Independent Development Trust (IDT) • Umsobomvu Youth Fund (UYF) • National Urban Reconstruction and Housing Agency (NURCHA) • Rural Housing Loan Fund (RHLF) • Micro Agricultural Finance Institutions of SA (MAFISA) • SA Micro Finance Apex Fund (SAMAF)

  5. Provincial DFIs in South Africa Gauteng Enterprise Propeller Limpopo Development Corporation (LIMDEV) Northwest Development Corporation Mpumalanga Economic Growth Agency (MEGA) Free State Development Corporation IthalaDevelopment Corporation Western Cape Investment and Trade Promotion Agency (WESGRO) Eastern Cape Development Corporation

  6. The IDC: Corporate profile • Established in 1940, the IDC is a self -financing, State-owned development finance institution • Provides financing to entrepreneurs engaged in competitive industries and enterprises based on sound business principles • Pays income tax at corporate rates and dividendsto the shareholder • Aims to maximise developmental and financial returns within an acceptable risk profile The IDC’s Head Office in Sandton (Johannesburg)

  7. The IDC’s industrial & entrepreneurial development approach • IDC addresses market failures by supporting investments, which may otherwise not happen, in partnership with private sector companies • This entails taking a higher risk profile than commercial financiers in order to support the development of sectors and new entrepreneurs through • Diversifying the economy through supporting a range of sectors • Encouraging the introduction and development of new industries and products • Developing internationally competitive companies • Supporting the establishment of green-fields developments • Supporting expansions of existing businesses • Facilitating the entry of new entrepreneurs and supporting their development • Supporting the growth and development of small and medium businesses into competitive players • Encouraging regional development by supporting companies with regional comparative advantages Components being assembled for the Airbus A320

  8. The IDC’s vision, mission, objectives & outcomes To be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent” Vision The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles. Mission Supporting industrial development capacity Objectives Promoting entrepreneurship Sustainable employment Growing sectoral diversity Regional equity Growing the SME sector Industrialisation in the rest of Africa Broad-based black economic empowerment Outcomes Environmentally sustainable growth New entrepreneurs entering the economy

  9. Sectoral involvement • 1997 • Agriculture • Mining • Manufacturing • Property • Now • Agriculture • Mining • Manufacturing • Services - related • energy • tourism • IT • telecoms • motion pictures • healthcare & education • transport & storage • venture capital • government / corporate tenders • franchising • financial services • construction • 2010 • Other • public private partnerships • development agencies Holiday Inn Soweto

  10. Financial instruments • IDC offers a wide array of financial instruments to SMEs, including : • Equity • Quasi-equity • Commercial debt • Wholesale & bridging finance • Share warehousing • Export/import finance • Short-term trade finance • Venture capital • These may be provided singly or in combination Flexible deal structuring

  11. Financingcriteria • Financial assistance is provided for the development of new businesses, expansions or rehabilitation of existing businesses • Business case must exhibit economic merit (i.e. it must be profitable) • IDC finances fixed assets and fixed portion of growth in working capital requirements • Reasonable contribution expected from promoter/s • Minimum of R1 million • Security • Environmental compliance

  12. The IDC’s approach in developing SMEs Various approaches geared towards developing SMEs: • Normal instruments for SME financial support • Franchising: providing finance directly to franchisees and indirectly (wholesale) via franchisors • Special schemes from time to time • Venture capital funding • Risk Capital Facility • Agency Development and Support • Non-financial forms of business support (entrepreneurial skills development; research assistance)

  13. Market gaps: IDC differentiation funding approach Product offering IDC puts together the most appropriate financial package for the client, taking into account the IDC guidelines and the client’s specific requirements: • Capital and interest moratorium • Terms of loans • Equity investments • Cashflow considerations • Capital security (collateral) • Own unencumbered cash contribution • Pricing and fees

  14. Market gaps: IDC differentiation development schemes Special Development Orientated Pricing Schemes • From time to time (as the need is identified), IDC develops specific pricing schemes aimed at addressing market failures and the achievement of strategic objectives such as: • SME development • sector development • exceptional impact on job creation • Broad-base Black Economic Empowerment (BBBEE) • Industrial development zones • Rural development. • These pricing schemes have a pre-determined validity period and budget • Typically involve lower interest rates / required internal rates of return (IRR) and different conditions such as • lower collateral requirements • longer-term financing • lower contribution from promoters • longer repayment holidays than other financing

  15. TES R 1 billion Women Entrepreneurial Fund People with Disabilities Fund Equity Contribution Fund Development Fund Community Fund Market gaps: IDC differentiation development schemes • Gold loan fund (R34 m) • Social Development Scheme (R1 billion) • Township and Rural Hospital Scheme (R500 m) • R1 billion Transformation and Entrepreneurial Scheme (TES) aimed at serving the financing and entrepreneurial needs of South Africa’s marginalised groups IDC recently approved the following special schemes:

  16. High risk Risk Low risk Seed Start-up Expansion Stable Development IDC Angels VC Funds Funding sources PE Funds Commercial Banks Market gaps: IDC differentiation venture capital funding Foray into Venture Capital market, initially through a wholesale facility, but more recently in a direct manner – “angel” investments:

  17. Risk Capital Facility (RCF) Market gaps: IDC differentiation management of external funds • IDC manages funds on behalf of the European Investment Bank (EIB) • RCF biased towards SMEs and Black Economic Empowerment (BEE) enterprises • RCF offers a mix of concessionary funding (with an equity bias) and business support grants • Facilitates suitable capitalisation of projects and also provides the required training and assistance for emerging entrepreneurs • Use of RCF funding effectively lowers the average cost of funding to a project as required returns are generally lower than that of typical PE/VC funds • Funds are generally invested on a co-financing basis with IDC, thereby ensuring that due attention to risk assessment is given • RCF investment criteria are aligned with that of IDC to ensure that the focus remains on BBBEE, sustainable job creation, and both regional and rural development • The IDC recently unveiled a UD$30 mil fund for SMEs in partnership with Thales & Societe Generale

  18. Market gaps: IDC differentiation handling clients in distress The IDC’s approach to clients in financial distress • Clients with high-risk profiles are identified and given special attention to manage the IDC’s exposure, minimise potential losses and maximise sustainable development returns • The IDC assists companies in recovering from difficulties in order to limit any losses in jobs due to business closures • One of the main objectives is preventing financial failure of identified high risk clients who are unable to meet their financial commitments: • by initiating the restructuring and turnaround of such client (subject to the client displaying potential economic viability) • to ensure that the clients are able to continue with their normal business operations and thereby prevent the loss of job opportunities, technology, exports, etc. • safeguard IDC’s position

  19. Market gaps: IDC differentiation other forms of support • Training of entrepreneurs • Business support to entrepreneurs: IDC Business Support Programme was established to assist where appropriate: • potential clients in preparing a business plan; and • existing clients where e.g. shortcomings in the management capacity has been identified, if a short-term intervention is required, if it experiences financial difficulties. • The funding for the business support is born partly by IDC • Expanding IDC’s reach into rural areas • Support for community groups • Encouraging investments to address certain goals through incentives

  20. The IDC’s recent developmental track record • IDC total approval amounted to a record of R8.5 billion • More than 75% of the value of approvals to expansions and tart-ups • Significant investment in SMEs (56% of the total number of project funded) • R3.2 billion approved for black empowered enterprises (61% of the total) • More than 40% of jobs will be created in South African rural areas

  21. The IDC’s recent SME development track record • Significant investment in SMEs: • 56% of the total number of projects funded • R904 million • 3 300 people attended IDC sponsored courses which focus on teaching essential business skills. • R3.4 million in grant funding was committed to pre- and post-investment business support for IDC clients

  22. Success Stories: Case Study 1 Low Cost Windows CC • Project description • Started by a Black entrepreneur manufacturing steel windows in his backyard (Tsakane township, East Rand) • Since the founding of business in 2002, the IDC has approved various loans and guarantee facilities • The business generates anannual turnover of R10.8 million last year • It currently employs 39 people • Current status • It retains its township manufacturing base • It has broadened its production line to include sheet steel doors, windows and door frames • Planned expansion programmein the pipeline • Suspensive sale and revolving credit facilities to be provided • 11 new jobs to be created • Since the founding of the business the IDC has approved various loan and guarantee facilities amounting to over R1.5 million Financial Instruments

  23. Success Stories: Case Study 2 Holiday Inn, Soweto • Current status: • The hotel has created 43 permanent jobs and 49 annualised construction jobs • A community trust also holds a shareholding in the hotel • Project description • Holiday Inn is situated in Kliptown, Soweto township • Managed by Zuka African Tourism and Investment Corporation, a Black-owned hotel group • First 4-star boutique hotel in Soweto (located in “Freedom Square”), with 48 rooms catering for business and leisure tourism • The project benefited a local construction company - Cholane - which employs 12 people • IDC has invested R20.7 million • Loan and equity facility Holiday Inn Soweto Financial Instrument

  24. Success Stories: Case Study 3 Knysna Elephant Park Project • Developmental Impact • Developing poor rural communities • Supporting eco-friendly tourism in the Eastern Cape • Project description • Situated just 10km from Plettenberg Bay, at one of Garden Route’s premier eco-tourism sites • Started by adopting 2 elephants and has now grown to housing x number of elephants that roam freely across a 100 hectares farm • Over 70 000 tourists now visit the park annually. • Park has a restaurant, curio shop, budget accommodation, elephant back safaris and an interactive elephant education centre. • The park employs about 60 people IDC has invested R1.9 million in the project since 2002 Financial Instrument

  25. Success Stories: Case Study 4 Pick ‘n Pay • Project description • Project of converting 15 Score stores into Pick ‘n Paybranded stores • The IDC has funded two Score conversion in Ulundi (2005) and Vereeniging (2006) • Facility approved without contribution from the franchisees • Identified franchisees have undergone two-year training programme (1 year of theoretical training and 2nd year spent on new Pick ‘n Pay franchised outlet • Business model is able to carry 100% debt • IDC approved an amount of R129 million towards the conversion of 15 stores Financial Instruments

  26. Success Stories: Case Study 4 (cont) Pick ‘n Pay • Current status: • Ulundi store • Since the conversion, it has increased revenues six-fold from R1 million per month to over R6.5 million per month, • Increased employment from 35 to 140 • Vereeniging store • Improved from sales from just over R800 000 per month to over R3.6 million per month • Created 85 new job opportunities • Developmental Impact • Empowering local farmers by providing seedlings, boreholes and land to grow fresh produce which they in turn supply to the stores • Training of landowners in land preparation and small scale agricultural farming • Fresh produce from training garden is then donated to crèches and pensioners

  27. Success Stories: Case Study 5 Bliss Chemicals • Project description • Bliss Chemicals is the manufacturer of washing powder under the MAQ brand • It entered the SA detergent market as start-up in 2002, with its first production in September 2003 • It has now become one of the major players, with a substantial market share • Now exports to Angola, Botswana, Swaziland, Lesotho and Namibia • Currently employs 1000 people • Initial financing + second round – R12.5m working capital • Third round – R52.5m for building plant and equipment • Fourth round ( in the pipeline) – building expansion and new product line equipment Financial Instrument

  28. Success Stories: Case Study 5 (cont) Bliss Chemicals • Current status: • Current project annual turnover is R1 billion • Expansion is expected to create additional 300 jobs • Successful entrant in washing power market as well as competing with multinationals • The new product line will have similar uptake as Bliss establish itself as an alternative provider

  29. Concluding remarks • International experience has shown that the SME sector is one of the main stimulants for economic growth • SME development leads to redistribution of wealth and contributes towards job creation • In South Africa, SMEs have become very important vehicles for economic development due to their: • Higher degree of labour intensiveness • Lower average capital cost requirements • Ability to stimulate more competitive markets • Ability adapt to rapidly to changing market conditions • Ability to provide opportunities for aspiring entrepreneurs • A myriad of institutions serving mostly SMEs (i.e. non-micro), yet the sector continues to face inadequate access to finance • SME development forms one of the main pillars of IDC’s strategies for fulfilling its mission • As a catalyst for sustainable industrial development, the IDC has been at the forefront of enterprise development since its inception

  30. Day Month Year Thank you The Industrial Development Corporation 19 Fredman Drive, Sandown PO Box 784055, Sandton, 2146 South Africa Telephone (011) 269 3000 Facsimile (011) 269 2116 E-mail